JOE KERNEN, co-anchor: Good morning. Wealth in America. An exclusive CNBC survey on the state of the US consumer and a forecast for the country's economy. Under pressure, the world taking its cue from Wall Street this morning. After Friday's sell-off, Asian equities dropping overnight, European stocks opening in the red. Plus, Becky reporting live from the heartland. Beck.

BECKY QUICK, co-anchor: You know, Joe, with times as tenuous as these, we are turning to the world's most watched investor for a little bit of guidance this morning. The "Oracle of Omaha" joins us live this morning as SQUAWK BOX begins right now.

ANNOUNCER: This is a special presentation of SQUAWK BOX with Joe Kernen and Carl Quintanilla at CNBC's global headquarters, and Becky Quick live from Omaha with billionaire investor Warren Buffett.

CARL QUINTANILLA, co-anchor: Good morning for a Monday, March 3rd. Welcome to SQUAWK BOX here on CNBC, I'm Carl Quintanilla along with Joe Kernen and Becky Quick. And Beck, what a way to start the week. We have an amazing show on tap today.

QUICK: Yeah, guys, it sounds like we have a lot to talk about, and especially with the markets, everything that we've seen happening both on Friday and then overnight in Japan. A lot of questions about exactly how stable things are going to be this morning, so we're very lucky to have Warren Buffett standing right by to guide us through everything that's happening this morning, guys.

KERNEN: Indeed. Yeah, it's going to be interesting, Becky. I want to--you know, especially from the guy who coined the term "weapons of mass destruction" and "financial weapons of mass estruction."

QUICK: Right.

KERNEN: And...

QUINTANILLA: And following the letter on Friday.

KERNEN: Yeah, yeah.

QUICK: For derivatives.

KERNEN: And don't we know it. And he doesn't, you know, he doesn't make calls overall on the economy too much, what the Fed should do. He likes to buy businesses that are going to be worth more in the future. But we still are going to have to ask him today, what about--is this different? How much pain do we need to get out from under all these weapons of mass destruction? Look what it's done so far. What kind of slowdown will it be? It's going to be great.

CNBC has scheduled a one-hour special program on Buffett's unprecedented Squawk Box appearences.

It's called Warren Buffett - The Billionaire Next Door: Face to Face. It will be hosted by Becky Quick and airs tonight, Monday, March 3 at 9pm ET.

QUINTANILLA: Yeah. And given...

QUICK: All right.

QUINTANILLA: ...sort of the data we had last week, is this a matter of reality setting in, or is the situation actually getting worse than we thought it was going to be?

KERNEN: You don't like hearing a huge owner of insurance companies that the party's over, either...

QUINTANILLA: The party's over.

KERNEN: ...from someone who would know, I think. Right, Beck?

QUICK: Right. Right. That all came from the annual letter that Mr. Buffett put out to shareholders on Friday afternoon. And, guys, now that we've given a little bit of a hint of what we might be starting off talking about, why don't we bring him in right now.

Warren, I want to thank you very much for joining us today. Again, Warren Buffett, Berkshire Hathaway, joining us, guys. I should point out, we are live at the Nebraska Furniture Mart. Behind us and all around us, this is the brand-new electronics store that they just opened up last year. And so they've opened up early for us and given us a little bit of time to be sitting here. But, Mr. Buffett, thank you very much for joining us this morning.

WARREN BUFFETT (Berkshire Hathaway Chairman and CEO): Even if it's early, you can buy something if you'd like, Becky.

QUICK: Yeah, they'll open up the cash registers right away.

BUFFETT: Your credit's good.

QUICK: Well, as you know, we have a lot to talk about today.

BUFFETT: True.

QUICK: We want to get through the annual letter, we want to talk about what's been happening with Berkshire's earnings. But we also want to start off talking about what's happening in the global markets right now, and what's happening with the economy. Where do you think things stand right now in terms of the global strength of the markets?

BUFFETT: Well, you're getting sort of waves of deleveraging going on in different areas, and last week we had some deleveraging of the municipal bond market, which is not a market you would normally expect to get hit by that sort of thing. But we've had it--they really haven't deleveraged as much as they wanted, things like leveraged loans at the banks. They've been trying to sell them, and they haven't found the levels yet at which they'll move. But that's--you got a very leveraged world, and it's getting somewhat deleveraged.

And unfortunately for the people that are deleveraging, it was leveraged at crazy valuations in many cases. So people that are out--have been out on a limb financially are having the limb sawed off.

QUICK: Well, in the past we've--you've spoken with us, and Joe's asked you about this, the number of calls that you're getting on deals. What have you been hearing the last couple of weeks, and how would you judge exactly how chaotic things are based on the number of calls you're getting?

BUFFETT: Well, late last week it was pretty chaotic. I mean, we were getting calls on large portfolios of various fixed income type instruments, and even on municipals where multibillion dollar portfolios had been leveraged. And people set that position up because municipals look cheap relative to governments, and then they got a whole lot cheaper, and that happened day after day after day. And it--really, in 1998, the Treasury was sort of the other side of every trade on convergence trades. People shorted the Treasury and were long on other kinds of other things. Same thing's happened this time, only it's extended to something like municipals.

QUICK: OK. It's extended to something like municipals, and you're getting calls on all of these deals. And I take it they're not calling you and offering to sell them at 95 cents or 99 cents on the dollar?

BUFFETT: Well, it depends on the instrument. Some they're calling at 75 cents on the dollar. But--and we'll buy some, at some point. But there's a--there's a lot of merchandise out there that people are getting margin calls on, and they're not the small guy getting a margin call on stocks. These are big guys getting calls on billions and billions of dollars of fixed income positions.

QUICK: You know, there are suddenly a lot of people wondering what's going to happen with this economy and trying to pin it back to a time that we've seen in the recent past or maybe not so recent past. Some people say this is like 2001, some people say this is like 1989. Other people say this is like 1973 to 1974. What do you think?

BUFFETT: Well, it's nothing like '73, '74 yet. I mean, that doesn't mean it couldn't be. But in '73, '74 we had this stagflation situation, and we really had a meltdown in equity prices as really good companies got down to three and four times earnings and they weren't phony earnings. So nothing like that's happened in this situation. But of course in '73, '74, at some point during that, it didn't look like it had happened either. So every day is a new day, and we are seeing more fixed income type forced liquidations.

We're seeing more indigestion at banks with a lot of loans we don't want to have. So you're seeing a time of easy money in terms of price, but not so easy money in terms of availability.

QUICK: We also have talked an awful lot about what's been happening with the bond insurers. You made a deal that you brought up on our air a couple of weeks ago, where you said you would take over the municipal bond portfolios for Ambac, for MBIA, for FGIC if they came to you. Did you hear from any of them? Did any of them take you up on that deal?

BUFFETT: Well, we heard from them, but we tossed our hat in the ring, and they tossed the hat back. But fortunately--it's been fortunate for us, because we've been writing business that they insured, and we're getting a far better rate than we offered to take it over from them. So here--we've written 206 transactions in the last three weeks, and we have been paid an average of 3 1/2 percent to take on business that they wrote at 1 percent. But we don't pay until they go broke. So in effect, the municipality has to quit paying, and over here I've got the bond insurers. And it's just--it's the three you named plus a few others. And they have to go broke, and then we pay. So we're getting paid 3 1/2 percent to be in a secondary position when we offered to do it for 1 1/2 percent in a primary position.

QUICK: And we're still talking about municipalities.

BUFFETT: Municipals.

QUICK: We're not talking about CDO business or any of the other portfolios.

BUFFETT: Oh, no. We're not--no. These are all A-rated or better municipals insured--202 of the 206 are insured. And we've received $69 million of premiums for two billion of a par amount. The original insurer received about 20 million. And they're still primarily on the hook. So our price was all wrong.

QUICK: Why would this happen? I mean, why don't they come back to you at this point and say, `We'll take that 1 1/2 percent deal'?

BUFFETT: Well, it--they don't have much motivation to do it from the directors' level or the shareholders' level, and what they're hoping for is new money, you know, and I hope for new money too. I mean, who doesn't? And they may get it. In fact, MBIA has gotten a fair amount of money. But they--in the end, they--they're not really--they really haven't, in a sense, totally faced up to the mistakes that they've made.

QUICK: You say that they hope--you hope they get new money, as well, put in?

BUFFETT: Well, if they get new money, as long as they stay solvent we can't pay a claim on this. We get $69 million, there's no way we pay a claim because they are primarily liable if the municipalities go broke. Now, municipalities do go broke, or tax exempt issuing entities. People say it's risk free. Vallejo, California, town of 120,000, last Thursday the city council was scheduled to vote on going into Chapter 9 and going broke. And the thing about municipalities, if they decide it's the easier way to go, it could be contagious. Now, I don't think that necessarily will happen. It's unlikely to happen, but it's not impossible it would happen.

QUICK: OK. Warren, I know the guys have some questions from back in the studio as well. Joe, Carl, you guys want to jump in?

KERNEN: Yeah, I got a--we both want to jump in at some point. Can you hear me, Mr. Buffett?

BUFFETT: I can hear you fine, Joe.

KERNEN: Good, great. So last week, one of the things that threw the market for a loop was this new figure for the size of these weapons of mass destruction, $600 billion. And I'm just wondering--you know, you go back a ways, we both do--S and L crises, LDC debt. You remember all the times in the past when we've, you know, when we saw numbers like this. How does 600 billion compare? And is it the kind of thing that can throw our economy for a loop for an extended period of time, worse than our, you know, shallow recessions that we've become accustomed to?

BUFFETT: Well, it sure could. I don't know the answer on it, but it--nobody knows what the economy's going to look like a year from now or two years from now. But you have certain things in motion that could possibly lead to that, or it may not. But I--you can't rule it out. There's no way you can--you can say that the trouble we've experienced and the trouble we're likely to experience can't lead to something pretty severe. And maybe we'll be lucky and it won't happen. I've never made any money out of economic forecasting.

KERNEN: Right.

BUFFETT: I've made money by staying out of trouble.

KERNEN: But yet you were early with the weapon--you know, you knew that these--all these structured products, that sooner or later there would be a day of reckoning. The other thing I was thinking when you were talking about where we haven't gotten to those levels in--that we saw in the '70s, but as a person that epitomizes Graham and Dodd type investing, what--we've had a long, secular bull since the early '80s. We have not gotten to the extended part of, you know, where you get dividend yields at 4 percent, you get a priced earnings multiple that it--drops well below 10. When now that we see inflation in commodities like they are, is this the beginning of that cycle where we do get to a really stretched valuation on, I guess you'd call it a secular bear?

BUFFETT: Yeah, Joe, I don't know the answer. It's always a possibility. And--but, you know, I've never really been able to predict the stock market. I--when things get very cheap, I know it. When they get very high, I know it. And in between, I really don't know much about what's going to happen.

KERNEN: And--we're in between, I guess.

BUFFETT: I will--I will recognize it...

QUICK: Does that mean we're in between right now?

BUFFETT: Well, yeah. Thirteen hundred-plus on the S&P, you know. Stocks are not cheap. As it--as a group they're not in some bubble price. But they go to extremes every now and then, and when they do go to extremes you have to be prepared to act.

QUINTANILLA: Warren, it's Carl. You talk about munis. The...

BUFFETT: Hi, Carl.

QUINTANILLA: Good morning. The Journal this morning tries to interview a few muni bond fund managers, saying this is the kind of market they've been waiting for, where something goes from paying 5 percent to nearly 6 in a couple of weeks. You just said you will buy some. Are you champing at the bit, or are you going to wait for everything to come to you?

BUFFETT: I never try to--I try to avoid getting excited, you know. But there's no question that I salivate a bit more as the rates get higher. We made a bid on a $3 1/2 billion portfolio on Friday; we didn't get it. I don't think it sold either. So--and, you know, I may go to the office this morning, and if there's a large portfolio--and it can be five billion, it could be one billion, could be 10 billion--we would make a bid on it. But we try to have it reflect what's really going on in the market. And it's been pretty chaotic.

QUICK: Warren, at times like this, when you get an offer, how easy is it to come up--when somebody calls you, how easy is it to come up with that offer price, and how long does that last?

BUFFETT: Well, it--if it isn't easy to come up with the offer price, I don't make an offer. I mean, I have to--I have to decide myself where I'm willing to buy it. And--but, in this kind of a market, if somebody calls us and they say, `We have this list of 200 munis, and it's three billion' or something like that, we give them an offer that's, you know, it's basically--like the used car salesmen used to say on their warranties, 20-20. It was 20 seconds or 20 feet. Well, we're more or less that way in the municipal bond business. We--we'll give an offer good for a minute or something. We--there's no--we are not offering puts to the rest of the world for nothing. And a bid is a put as long as it's outstanding, and puts you're supposed to get paid for in this world. So we put them out for, you know, basically a minute or two. We want the fellow on the other end to be able and prepared to act, and we do not want him to use our price to out and shop with somebody else.

QUICK: Well, speaking of that offer you made on our air to the municipal bond insurers--or to the bond insurers to take over their municipal portfolios, is that deal still on the table?

BUFFETT: No, it's not on the table because you pay for puts in this world. And what we did offer to do at that time--people got this kind of mixed up, although it was--it was right on the program. We said they could take our offer and have 30 days to shop it, and then have--pay us a 1 1/2 percent kill fee if they found a better deal. So they could have used our offer for 30 days to go out all over the world and see if anybody'd make them a better deal. What they did was they said it was a terrible offer, but they didn't go out and try to get a better deal on it. So we--no, we don't leave offers on the table for--we don't leave them on the table for an hour in a market like this. You don't want to go down on the New York Stock Exchange floor and say--if General Motors is at 24, and say, `For the next hour I'll pay 24 if anybody wants to sell it to me.' I mean, you'll get it if it goes to 23, and you won't if it goes to 25.

QUICK: Right. Guys?

KERNEN: Go ahead.

QUINTANILLA: Now--and--well, we got so many--where to start is the question.

KERNEN: I've got it, I've got it. I've got a lot of other ones that they're just asking. You know, we had this--we had Charlie Gasparino say a week ago Friday say the Ambac deal was close, and then this past Friday part of the reason we saw the big sell-off was because there were significant stumbling blocks I guess. I haven't heard what Charlie's going to say today. Knowing, as you do, that there's no free lunches and things--you know, people don't enter into transactions out of--well, not usually out of stupidity, but how's this--is it going to be possible to structure something for Ambac that's going to, you know, cause someone putting the equity in to feel comfortable with the situation, given the looming CDO exposure that the company still has?

BUFFETT: Yeah, it may be possible. There may be people that feel that they understand the risk that's already in the portfolio and see enough opportunity in the future that they're willing to take on that risk. It's not possible for me to do that. But who knows? You know, there's money all over the world, and I would not be surprised if they were able to raise money. I would not be surprised if they weren't able to do it. If they raise money, like I say, we've made an easy $69 million in the last three weeks, because if any of those bonds go bad, and some will, they pay--they pay first. So, in a sense, I should be out trying to help them raise money.

QUICK: Warren, in your annual letter to shareholders on Friday, one of the big attacks that you took was on companies and how they are expecting their pension plans to grow over the next several decades and beyond that. What caught your attention on that? Why are you focused on that?

BUFFETT: Well, I--actually, I've written about it before, too.

QUICK: Hm.

BUFFETT: The pension fund assumption--you can take your earnings up or down by changing your pension fund assumptions. And within a fairly wide range, the professionals, the auditors will let you pick different numbers. So you have companies--if you look at the S&P 500, you have companies picking lots of different numbers. And the higher the number you pick for an investment return, the lower the charge that's made against your earnings. And if you go back far enough, 30 or 40 years ago in accounting, they didn't make you make any charge. And they soon found out that was folly. And General Motors has been living with that, you know, in terms of particularly in the health plans, since. I say that most companies and a great many municipalities or public bodies are using rates that are really a little crazy. And a year like this may dramatize that. Now, you're not supposed to look at one year returns in setting these rates, but we set--we have some public utilities, and they have pension plans, and in those cases, the states tell us what rates we have to use. We argue for lower rates, but they won't let us go as low as I'd like. With our own pension plans, we use a 6 1/2 percent return, and the world is generally using 8. And that doesn't sound like much of a difference, but it's a huge difference.

QUICK: It's a huge difference when you roll it out and annualize the compound interest over a number of years.

BUFFETT: Yeah.

QUICK: You asked our viewers last week on cnbc.com...

BUFFETT: Right.

QUICK: ...where they expected the Dow to close at the end of the century, December 31st, 2099. For those of you who haven't seen this yet, we'll show you the poll results. It came back that somewhere close to 34 percent were looking for that level of 100,000, another 33 percent were looking for over a million, and about 23 percent were looking at a level of quite a bit more than that.

BUFFETT: Mm-hmm.

QUICK: Ten million, or the third question that you had was 10 million.

BUFFETT: Mm-hmm.

QUICK: So where should people be looking? Here's the number that you see right now.

(Graphic on screen)

DJIA at Dec. 31, 2009

100,00 34%

1 million 33%

10 million 23%

100 million 10%

Source: CNBC.com Poll

BUFFETT: Well, I'm not sure where they should look, but the--but if it turns out to be 100,000, that means that people in this century, from the start of the century, will have had a return, including dividends, of about 4.2, 4.3 percent. That's before expenses. Now, commissions, investment adviser services, all of that comes out of that 4.3 percent.

QUICK: Right.

BUFFETT: So that's a gross return. And I would say that most people think that if the Dow went to 100,000 by the end of the century that they'd have had maybe double-digit returns or something like that. If the Dow is at 10 million at the end of the period, you still haven't had double-digit returns, believe it or not. So people can get kind of careless with numbers. Most people aren't too numeric.

QUICK: But this is a word of warning to investors out there, and, Warren, you've been gracious enough to offer to stay with us throughout the entire show this morning. Throughout the morning, we're going to be getting to some of those answers from the questions that you all have been sending in, our viewers. We've gotten thousands of questions. And in the next half-hour we'll be getting to a lot of the answers of those questions. But right now, Joe, I'll throw it back over to you.

KERNEN: All right, Beck, thank you. Let's hope that furniture store in the middle of the day doesn't look like that. I don't know. You know, we've been...

QUINTANILLA: It's going to get busy.

BUFFETT: This store did 400 million last year, Joe.

KERNEN: All right. All right. I'm not worried about you. I'm not worried about you. Your businesses, but...